Share scheme failures cost more than just penalties

Share scheme failures cost more than just penalties

Fri 17 Jun 2016

Certainly not coincidentally with the approaching deadline for making employment-related securities (ERS) returns, HMRC have published two new factsheets setting out the amounts of penalties relating to ERS arrangements and returns and their approach to charging those penalties.

Material inaccuracy in an EMI annual return form CC/FS32

£5,000 is the maximum penalty for a material inaccuracy in an EMI return that the employing company does not correct without being prompted. This penalty can apply regardless of whether the inaccuracy causes a loss of tax.

The penalty may only be charged if the inaccuracy is either careless; in which case up to 30% of the maximum will be charged; or deliberate, in which case between 35-100% may be charged. (NOT 1,000%, as initial editions of CC/FS32 suggested: that was a typo)

Correcting errors can avoid penalty

If a company makes an innocent error in a return but corrects it before HMRC find it, HMRC cannot charge a penalty: penalties are charged where HMRC find an error that has not been corrected.

But once a company has found an innocent error it is potentially liable for the higher range of penalties if it doesn’t take prompt action to correct the error. It is unlikely that a company could get away with a ‘careless’ penalty since having knowledge of the error would make almost any failure to correct deliberate.

Failure to meet the requirements for SIP, SAYE, CSOP and EMI tax advantaged status form CC/FS33

This penalty applies if tax is lost due to an error in a return. The basis of calculation depends on whether the failure is:

  •   serious- a fundamental flaw in the rules or the way the scheme is operated; or
  • •less serious- correctable by amending or repairing a mistake in drafting the rules;

Serious failures

The basic penalty is 200% of the amount of tax and NIC lost. The penalty may then be reduced depending on whether or not the company discloses the inaccuracy and that disclosure is prompted or unprompted:

  • undisclosed inaccuracies- those that HMRC uncover, will be subject to a penalty of 200% of the tax and NIC;
  • prompted disclosures- made when the company can expect that HMRC likely to discover the failure, and not only when an enquiry has been started, will be subject to a penalty of 150%; and
  • unprompted disclosures- made when the company has no reason to expect that HMRC will discover the failure, will be subject to a penalty of 100%.

Unprompted disclosures will be possible in cases, expected to be rare, where an enquiry is in progress but that enquiry would be unlikely to reveal the failure.

100% will be the minimum penalty  for serious failures

Less serious failures

Penalties for less serious failures will be based on 100% of the amount of tax and NIC underpaid but subject to a maximum of £5,000. That amount (the lesser of 100% and £5,000) will be reduced by:

  • prompted disclosure – 50%; and
  • unprompted disclosure – 100%, i.e. no penalty.

In cases where there is no disclosure the full penalty will apply.

Remember there’s more to lose than penalties

Behaviour that may give rise to a penalty is always to be avoided but the penalties can pale into insignificance compared to the other costs of getting ERS wrong. Defects in implementation can cost schemes their tax-favoured status. At best these can lead to lengthy, costly remedial action: at worst companies and employees may be left without the benefits of the tax advantages they sought and expected and the price of compensation for those losses can be vast.

If you are concerned about reporting on your employee share scheme or would like to learn more about setting up a scheme, we’d be pleased to offer advice.

 

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